Lafarge Africa Loan Restructuring - Silver Lining Or Same Old Story

Lafarge Africa Plc recently released an explanatory note to shareholders on its planned debt restructuring of its parent company’s loan ahead of the extraordinary meeting wherein the company expect to receive approval for its premeditated N90 billion rights issue.

While the refinancing plan is in line with our view (See report: Remain Cautious on Near-Term Headwinds), we had expected the company would use part of the proceeds of the right issue to reduce the parent company’s loan to N89 billion (from N149 billion), which will be rolled over with an extended maturity of 7 years.

However, details from the explanatory note showed that management intends to restructure the outstanding total facility of $308 million which is expected to mature in 2018. Precisely, management intends to extend the maturity of $293 million (at a relatively higher cost) to 7.5 years with two years moratorium while the balance of $22.2 million will be converted to equity via the rights issue.

Accordingly, we have updated our model to reflect the still elevated debt position and the refinancing premium on the extended facility.

Going by details of the explanatory note, the restructured loans are being priced at a post moratorium rate of 3-month Libor+6.35% (2-year moratorium rate of 12-month Libor+6.35%), a 64bps premium to the average rate of 3-month Libor+5.71% on the original facility (compared to our earlier estimate of 50bps premium). Accordingly, we have raised our interest expense forecast to reflect the higher borrowing rates and revised our debt position estimate higher to N224 billion (prior estimate of N171 billion).

Table 1: Terms of Original Intercompany Loan

On interest expense, we have adjusted our financing cost over the forecast period for the restructuring premium, which necessitated 20bps average upward revision to our forecast interest rate and have thus raised interest expense for FY 18 to N35 billion and associated

With the company’s loan from its parent conveniently aligned via restructuring, the management is now seeking approval from shareholders for a N90 billion rights issue. In

one part, N40 billion of the proceeds of the issue will be used to finance short term obligation with First Bank (FBN) and N20 billion will be used to refinance the company’s CP programme (with N10 billion already issued, management guided to additional N10 billion

before the end of the year with maturity of both series matching the conclusion of the rights issue). On another part, the company’s short-term obligation of $22.2 million (N7.9 billion) Rights Issue, still financing short term obligations to Caricement BV. will be converted into equity via the rights issue. Accordingly, we estimate net proceed from right issue of N21.6 billion.

With the first tranche (N26.4 billion) of the N60 billion bond issued in 2016 due for maturity in Q1 2019, we expect the company to issue additional N10 billion CP which combined with excess of the proceeds from the rights issue should be sufficient to cover the repayment.

On balance, post rights issue, with management expected to drawdown another $20 million from Caricement BV. to bridge working capital requirements, we expect the parent company’s loans to remain much of the same at $313 million (current: $315 million), albeit

with a longer maturity profile.

Beyond 2018, we expect the impact of the rights issue to have more telling impact as the company refinance its expensive short-term borrowings, especially its obligation to FBN and part of the corporate bond – priced at 17% and 17.2% respectively – with cheaper financing.

Coalescing this with our expectation of lower borrowings over our forecast period, save for short term working capital needs, we expect average debt position of N163 billion over our forecast period and thus forecast a gradual moderation in financing cost. Specifically, in 2019, we expect a 38.5% YoY decline in net finance expense to N24.9 billion (prior: N26.8 billion). Accordingly, we have raised our FY 19 PAT estimate higher to N13.3 billion (prior: N11.4 billion).

With the above adjustment to our model unlocking additional N4.29 for our FVE to N27.94, we now have a NEUTRAL (prior: SELL) rating on the company at current price of N25.50. Overlaying our FVE on the planned N90 billion rights issue, we expect circa N0.61 average EPS dilution over our forecast period. However, we are yet to incorporate the additional shares in our estimate. Lafarge trades at 2018 EV/EBITDA of 7.6x which compared to Bloomberg EMEA peers of 13.4x.